This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio.
Emerging market economies are growing rapidly, home to 85% of the world’s population, they account for almost 60% of global GDP. This is up from 50% only a decade ago, according to the International Monetary Fund.
As the developed world faces an ageing population and low level of economic growth, emerging markets have supportive demographics. Growing middle classes have larger disposable income and typically larger families. Many developed market-listed stocks have expanded their presence in emerging markets, hoping to get a slice of the pie.
These companies present an opportunity for investors who do not wish to invest directly in emerging markets, where gains can be vulnerable to geopolitical influences. Investing in stocks listed in developed markets with revenues from emerging markets can be a lower risk option.
Below we share five stocks listed in FTSE 100, which have more than 50% of their revenues from emerging markets according to Morningstar Direct data.
Merlin Entertainments (MERL)
Merlin Entertainments’ main business is the operation of theme parks. Most of its revenue is derived from its Midway Attractions division of indoor venues. The stock gains 7.9% year to date.
Known in the UK as the operator of theme parks Alton Towers and LegoLand, Merlin Entertainments is not limited to the UK. They currently have four theme parks in China, one in Korea and two in South East Asia. The company will also open a theme park in Dubai in October this year, and continue to explore opportunities in China.
“Merlin has a diverse portfolio of global brands with over 70% of 2016 profits from outside the UK and this proportion will only grow over time as we continue to invest internationally. I remain confident in the company's underlying growth prospects,” said Nick Varney, chief executive of Merlin Entertainments.
Richard Buxton, manager of the Old Mutual UK Alpha Fund and Steve Davies, manager of the Jupiter UK Growth Fund both back the stock, believing the company is a “fabulous long-term structural growth story”.
“I can see their growth story out to 2030 and there are not many companies particularly in the top end of the FTSE 100 that you can say that about,” said Davies. According to Morningstar data, fund management group BlackRock owns 8.7% of the company.
Unilever (ULVR)
With 57% of reported sales derived from emerging markets in 2016, Unilever has one of the largest emerging market footprints of all the global consumer staples manufacturers, which should be a long-term volume driver for the business, said Philip Gorham, senior equity analyst at Morningstar.
The stock has gained 31.7% year to date. It is rated as a three-star stock by Morningstar analysts, meaning analysts believe the stock is trading on its fair value estimate.
The company is in the household products industry. It is a supplier of fast moving consumer goods. Its areas of operations are personal care, home care, foods and refreshment.
Unilever bought Dollar Shave Club with $1 billion last year, which will give Unilever a leading presence in the emerging business-to-consumer channel, with opportunities to expand its online subscription channel platform, said Gorham. The high presence in emerging market will help Unilever to grow in line with or ahead of its peers, albeit at an industry growth rate that may be slightly below its historical average, Gorham added.
British American Tobacco (BATS)
British American Tobacco is one of the strongest emerging markets plays in its peer group, with more than 80% of volume and almost 60% of revenue derived from emerging markets, said Philip Gorham, senior equity analyst at Morningstar. Share prices of the company rose 17% year to date. The stock is rated as a two-star stock by Morningstar analysts, meaning analysts believe the stock is trading over its fair value estimate.
It is also the third-largest global cigarette maker behind China National Tobacco and Phillip Morris International.
In the long term and as emerging markets mature, there is an expectation of significant growth in the company's dividend, said Gorham.
Diageo (DGE)
As the world’s largest spirits company, Diageo generates at least 50% of revenue from Asia, Africa and emerging markets, said William Ball, senior equity analyst at Sanlam UK, a fund management firm.
“Through its acquisition of United Spirits which is took control in 2014, it owns the largest spirits business in India,” said Ball.
Morningstar’s Gorham added that he believes there is more consolidation to come by the company in an attempt to strengthen its presence in emerging markets. The spirits industry is slightly more cyclical than beer, particularly in the premium segment and above, said Gorham.
There are also challenges that must be addressed, such as the structural volume declines in China, the positioning of Smirnoff in the US, and a broad slowdown in emerging markets, however Gorham does not believe that these are self-inflicted wounds.
The stock was up 9% year to date and it is rated by Morningstar analysts as a three-star stock, meaning analysts believe the stock is trading at its fair value estimate.
HSBC (HSBA)
It comes as no surprise that HSBC makes the list, given that the bank’s name is an acronym for Hong Kong Shanghai Bank. The bank was based in Hong Kong for more than 100 years, and only moved its domicile to London in 1993 ahead of the transfer of sovereignty of Hong Kong from the UK to China.
With China, Hong Kong, Malaysia, and Singapore being important pools of wealth and growing trade corridors, around 75% of the bank’s pre-tax income comes from Asia. The stock gained 17% year to date and it is rated as a two-star overvalued stock by Morningstar analysts.
Stephen Ellis, director of financial services equity research with Morningstar likes the bank’s pivot toward Asia, as it takes advantage of HSBC’s strengths. The region is growing in terms of importance for global trade, increased urbanization, and a growing middle class. The bank’s strengths in Hong Kong position it well to take advantage of growth in the Pearl River Delta, and it is already the leading international bank in China. As a result, HSBC is well positioned to capture economic rents via growth in asset management, Chinese yuan internationalization, and consumer-oriented lending, said Ellis.
Sanlam’s Ball added that there are another two UK-listed companies with strong presence in emerging markets: UK listed miner Anglo America (AAL) has roughly 75% exposure to Asia and Emerging Markets, while service provider Intertek (ITRK) has 60% exposure in Asia and another 5% in Africa and the Middle East.
